Post on 22-Sep-2020
transcript
Do Investors Flip Less in Bookbuilding than in Auction IPOs?
Suman Neupane – Griffith University, Australia
Andrew Marshall, Krishna Paudyal, & Chandra Thapa – Strathclyde University, Scotland, UK
Emerging Markets Finance Conference
Mumbai, India
13-17 December 2016
Agenda
Motivation
Contributions
Context (Institutional setting)
Hypotheses
Data
Results
Conclusions
Motivation
Optimal mechanism to manage IPOs
Three mechanisms: Bookbuilding, auctions and fixed priced offerings
Bookbuilding has become the most dominating mechanism around
the world (Jagannathan et al., 2015)
Motivation
Bookbuilding vs Auction – Discretion in Pricing and Allocation
Proponents of Bookbuilding: establish relationship, extract information &
increase pricing efficiency (Benveniste and Spindt, 1989; Benveniste and
Wilhelm, 1990; Sherman, 2000; Bubna and Prabhala, 2011)
Opponents of Bookbuilding: develop quid-pro quo relationships (Loughran
and Ritter, 2004; Nimalendran et al., 2007; Ritter, 2011); CLAS
Controversies
Motivation
Flipping – Selling IPO allocation in the first few days of listing
Flipping important to both issuers (look for long term investors –
‘strong hands’) and underwriters (market stabilization)
Discretionary power – do investors flip less in bookbuilding compared
to auction IPOs (Using data on foreign institutional investors)
Contributions
First study, to the best of our knowledge, on the flipping behavior of investors
across the two main IPO allocation mechanisms.
We contribute to the debate on the efficiency of IPO mechanisms and show
that giving underwriters allocation discretion can help reduce flipping by IPO
investors
We also present evidence on the less discussed non-frequent investors
participating in IPOs
The Indian IPO Setting
Pre – Nov 2005: Modified form of bookbuilding mechanism
(discretionary allocation to institutional investors)
Securities and Exchange Board of India (SEBI) removed the
discretion in Nov 2005 – Dirty Dutch Auction (underwriters free to set
a price below the market clearing price but required to use prorated
allocation)
Hypotheses
Bookbuilding – underwriters have allocation discretion
Pitch-book view – allocation to long term investors (Cornelli and Goldreich, 2001; Jenkinson and
Jones, 2004; Jenkinson and Jones, 2009)
IPO Process: repeated interaction between underwriters and underwriters – helps underwriter
develop a sustain relation with a network of investors (discourage investors from flipping)
Underwriters in auction mechanism have no power in penalizing flippers (Degeorge et al., 2010)
H1: IPO investors flip less in bookbuilding than in auction IPOs.
Hypotheses
H1a: For IPOs managed by high reputation underwriters, investors flip less under the
bookbuilding mechanism in comparison to auction IPOs.
H1b: In IPOs where the demand is weak, investors flip less in bookbuilding than in
auction IPOs.
H1c: Frequent investors in bookbuilding IPOs should flip less than frequent investors in
auction IPOs.
H2: Investors in IPOs retain their allocation for longer periods under bookbuilding in
comparison to the auction mechanism.
Data IPOs issued over the Jan 2004 – Dec 2006. 45 bookbuilding & 58 Auction IPOs
Data on foreign institutional investors (FII) – National Securities Depository Limited (NSDL)
Foreign Portfolio Investor Monitor database.
A total of 3,009 primary trades for our sample of 103 IPOs
Underwriters: 30 manage the 103 IPOs; 7 high reputation underwriter who are active in both
the regimes. [Same high reputation underwriters in both the regime]
Cold IPOs: Underpricing 10% or less
Main variable of interest: Mechanism [1 = bookbuilding & 0 = auction]
Results
Robustness Tests
Excluding IPOs from the last two months of the bookbuilding regime
Exclude 9 bookbuilding IPOs issued in the month of November and December of 2005
Coefficients of the mechanism dummy across all the specifications is markedly larger
Alternative specifications: Cold IPOs, Frequent & Non-Frequent
Investors; alternative approach to constructing terciles
Conclusions
The paper contributes to the debate on the choice of IPO mechanism.
Uses data from Indian IPOs and compares flipping across bookbuilding and auction IPOs
By analyzing flipping by FII, we find that investors in bookbuilding IPOs flip considerable less than
investors in auction IPOs.
Results hold for both frequent and non-frequent investors.
Results are stronger when bookbuilding IPOs are managed by high reputation underwriters and
have weak demand.
Allocation discretion appears to benefit both issuers and underwriters.
Thank You!